The film business and the value chain

‘I think someone who has writing talent and who also understands how the television, film and games industries work, will be more successful as a writer. They understand that you’re not writing for the public, you’re writing for the people who can invest money.’ (Julian Friedmann, writer’s agent)

The value chain concept

It’s a long journey from the first idea for a script to the public seeing the finished movie, and a lot of money and risk is involved along the way. As the film industry academic Jason Squire put it: ‘No other business is a single example of product fully created at an investment of millions of dollars with no real assurance that the public will buy it.’ In other words, film making is a risk business, so it’s important to understand how the film industry works, and how the different players fit together (or compete with one another).

The term ‘value chain’ was first used in 1985 by Professor Michael Porter of the Harvard Business School in his seminal book Competitive Advantage: Creating and Sustaining Superior Performance. The value chain is a connected series of activities that work together to create and deliver a product to customers. Strictly speaking, the term refers to the activities of one single corporation, like a Hollywood studio, for instance. The different activities – or business functions – each add value by developing, manufacturing, distributing, providing accounting or legal services, managing people, and so on. For a general business, these are divided into:

Support activities (or infrastructure) – including procurement, technology development and human resource management

Each of these activities represents a cost as well as adding value, so the income from the business that is left after deducting the cost of these activities is the margin or profit.

For discussing the value chain when it is made up of separate freelance or independent companies all working together, as on a film project, the term value system may be used. A value system can be made up of:

Suppliers – who sell materials or services to the

↓

Manufacturer – who makes the product, e.g. a film, and sells or transfers ownership to the

↓

Distributor – who carries out physical or online distribution or sales to

↓

Buyers – who may be end-users (consumers) or retail customers (shops or online) who sell to the end-users

Each of these stages has its own cost, so the profit is the income from sales minus the costs of these stages in the development, manufacture, marketing and distribution (or sales) of the product. The profitability of the central manufacturing company is largely determined by what it pays for the goods or services it buys from suppliers (this is known as upstream) , what its own manufacturing costs are, and what it charges (prices) for what it delivers to its distributors and customers (known as downstream).

Each of the companies may have its own support services, such as marketing, accounting services and so on, all of which must be able to demonstrate that they add value, because their costs will be included in whatever price is charged for their goods or services.

Studios vs. independents

The value chain or value system approach can be applied to any industry, from food stuffs to cars. With the film industry, there are important distinctions to be made between the way the studios work (in both the US and some European countries), and the way that an independent film producer works.

Studios

In the studio system a film is often developed, financed, produced, distributed and further exploited (through spinoffs, games and so on) almost entirely without leaving one single integrated company (including its subsidiaries).

Of course, any part of the process can be outsourced to a different company. This can be done in a variety of ways. For example, most of the people working on a film shoot will usually be freelancers who are not permanently employed by the studio (camera crew, actors, directors and so on). An independent producer often develops a film, and then brings the script to the studio for them to fund the production, and carry out the distribution of the film.

There are many examples of studios that control or own all or most of the value chain outside the US. These include the French Pathé, Wild Bunch (with distribution also in Italy, Germany and Benelux), and Vivendi-owned StudioCanal (who bought distributors Optimum in the UK and Kinowelt in Germany); in Canada E1 and Alliance (who have distribution in the UK through Momentum and in Spain through Aurum Films); the Japanese film company Shochiku; and in Australia there is Village Roadshow.

Studio value chain (including spinoffs and merchandising)

The value chain of a studio consists basically of the following component parts:

The ‘negative’ stream (that is the cost-bearing activities of film production)

This consists of:

Pre-production – including acquisition of rights or options, finance, development and cast and crew

↓

Production – including design and organization, and shooting

↓

Post–production – including processing and SFX, picture editing, and sound and music

Prints and advertising stream consisting of:

Market research and preparation – which feeds into the pre-production and production stages and vice versa

↓

Marketing, advertising, publicity and public relations – which feeds into the production stages and vice versa

↓

Duplication – which sound and music feeds into from the post-production stages

↓

Distribution – sending copies of the film out to theatres or online sites for download

Thus the film or entertainment product, based on the film, is created and produced. This can be divided into two streams that generate revenue; the exhibition stream and the auxiliary stream:

The exhibition stream – including the cinema version of the film or television programme itself (either broadcast or pay-TV), leading to DVD and video and online distribution

The auxiliary stream – merchandise (toys, T-shirts and so on); advertising revenue; media spinoffs (games and music); and technology spinoffs of various kinds

(This analysis is based on Vickery and Hawkins 2008 paper Remaking the Movies: Digital Content and the Evolution of the Film and Video Industries)

Independents

So what about the independent film? An independent film is basically not a studio picture, and its development finance and production finance is provided by more than one source. The producer and a number of different financiers share some or all of the investment risk. Therefore the independent film operates in a value system, because the film is not made and delivered to its final audience by a single company (the studio), but by a system of interrelating companies, businesses and freelancers, all working on different elements of the production or the exploitation process, and adding value in different ways along the chain.

As part of operating within a multi-player value system, independent films are usually acquired, marketed and distributed by different distributors in different territories in the world. The independent distributor chooses which films to buy the rights to distribute, and may decide to acquire in advance of the film being produced (the pre-sale), or may wait until after the film is completed. Occasionally, an independent film is picked up by a Hollywood studio to distribute in several territories; or even the world.

Once the film is finished, the money handed over by the consumer (in return for a cinema ticket, DVD purchase or online download) is subject to various revenue shares or commissions as it passes back through the value system, which then complicates the revenue flow. But the bulk of the revenue is controlled by the distributor, and therein lies the weakness of the independent producer or financier: they do not decide and therefore cannot increase the percentage revenue shares arising from even the most successful film.